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Correct Use of Firecalc?
Old 11-20-2006, 12:45 PM   #1
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Correct Use of Firecalc?

I think maybe I found a way to use Firecalc to calculate the longer-term effect on my safe withdrawal spending caused by the shorter-term tax payments from my TIRA-to-Roth conversion program (I'm 60 years old now and I'd be paying annual conversion taxes up to the top of the 15% tax bracket for the next 10 years, then I'd stop converting when TIRA MRD's start at age 701/2):

On the first page ("How Much Will You Spend?"), I entered the target amount of my conversion tax payments as an "Increase" of my withdrawal starting this year (2006). I check the inflation-adjusted checkbox in order to keep up with the future 15% bracket creep.

Then I enter the same number (the target amount of my conversion tax payments) as a "Decrease" in my withdrawal starting in the year of 2016 (10 years later). And I ask Firecalc for my results in terms of "how much (I) spend each year."

(Question: should I check the inflation-adjusted checkbox for this "Decrease?" It makes a significant difference in the results if this "Increase" and "Decrease aren't both inflation-adjusted (or not). So should I always keep this withdrawal "Increase" and "Decrease" the same in this regard, that is, they both should be inflation-adjusted or both not be inflation-adjusted? This is an important distinction, I think.)

The results show that the decrease in my safe annual withdrawal spending over the next 30 years is equal to roughly one-half of the conversion tax payments I'd be spending "extra" over each of the next 10 years. Does that sound right? If so, it means this conversion program is more affordable than I prreviusly thought.

The question is: does the above method properly use Firecalc to simulate the tax payment effect of my proposed 10-year Roth conversion plan? Am I making any mistakes here? I really appreciate any comments and suggestions on how to use Firecalc as accurately as possible for the scenario as set forth above. Thanks a lot, everyone, for all your help!
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Re: Correct Use of Firecalc?
Old 11-20-2006, 03:36 PM   #2
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Re: Correct Use of Firecalc?

halo, I think you run the risk of measuring with a micrometer and cutting with an axe.

But it seems to me that in this scenario you'd want to decrease the amount spent in year 11 (when you stop the conversions) by the extra you spent in year 10 (which would be quite a bit MORE than the extra amount spent in year 1)... and then you would NOT peg the reduction in year 11 (and subsequent years) to inflation. You're basically spending an extra amount that gradually increases for 10 years, and then the extra spending goes to zero, is that correct? If it goes to zero there wouldn't be any inflation involved from year 11 forward - unless I misunderstand what it is you're trying to do.

Personally, I wouldn't use FireCalc this way. Two years into retirement all the projections I made were out the window. FireCalc provides a good reality check, but it's probably best not to push its limits.
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Re: Correct Use of Firecalc?
Old 11-20-2006, 05:08 PM   #3
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Re: Correct Use of Firecalc?

Bob

Thanks for your reply. The reminder not to measure with a micrometer when you're going to be cutting with an axe is well taken - it's always good to remember that. Firecalc is good for ballparking at best.

However, is it really pushing the limits of Firecalc to ask it to factor in a spending increase for only "x" number of years and then just stop that spending? The calculator does seem to have that function built into it's basic design on it's very first page.

If you enter an inflation-adjusted 15K spending increase starting now in 2006, the calculator adds that inflation-adjusted amount into your spending for the ENTIRE plan period - say you chose 30 years (where it says "when will the plan end?"), right?

Then, if you want to simply "turn off" this 30-year 15K inflation-adjusted spending increase 10 years from now, you should be able to accomplish this by just entering a separate 15K decrease in spending in 2016, and Firecalc's inflation-adjusting program would automatically adjust the 15K upward to account for 10 years worth of inflation and then decrease the spending by that increased amount, thereby cancelling out the original inflation-adjusted 15K spending increase started 10 years earlier. Wouldn't that be how it works? Simple, no?

Why would the calculator give you the option for a future decrease OR increase in spending to be inflation-adjusted in the first place if it didn't automatically adjust for the future inflation? Otherwise, it wouldn't give you that option, right? I would think that you don't have guess what 15K would become when adjusted for inflation 10 years from now - the program should do it for you. Is there something I'm missing here?

Maybe this is a question for Dory36 or someone who really knows more details about how Firecalc computes future inflation-adjusted dollars for future spending increases and decreases. Does anyone here know more about this?

Dory?

Thanks again for all the feedback.
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Re: Correct Use of Firecalc?
Old 11-20-2006, 06:39 PM   #4
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Re: Correct Use of Firecalc?

Quote:
Originally Posted by halo
Then, if you want to simply "turn off" this 30-year 15K inflation-adjusted spending increase 10 years from now, you should be able to accomplish this by just entering a separate 15K decrease in spending in 2016...
Yes, now I see what you're saying and I think that is correct. Maybe someone else will confirm it.
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